RBI to replace NHB rules with its own set as the new HFC regulator

Central bank sets a formal definition of 'housing finance' in draft released on its website

As the new regulator of housing finance companies (HFCs), the Reserve Bank of India (RBI) on Wednesday proposed to modify the rules governing these firms.

The RBI took over the powers to regulate HFCs from the National Housing Bank (NHB) in August 2019.

In the NHB regulations, according to the RBI, there was no formal definition of ‘housing finance’. In a draft released on its website, the central bank set a formal definition for the same.

Housing finance would now mean “financing, for purchase/ construction/ reconstruction/ renovation/ repairs of residential dwelling unit ...” for a whole host of functions that would include giving loans to companies and government agencies for employee housing finance projects.

“All other loans, including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than buying/ construction of a new dwelling unit or renovation of the existing dwelling unit, will be treated as non housing loans,” it said.

In its draft guidelines, the RBI also classified HFCs as systemically important and non-systemically important. “Non-deposit taking HFCs with asset size of Rs 500 crore and above; and all deposit taking HFCs, irrespective of asset size, will be treated as systemically important HFCs. HFCs with asset size below Rs 500 crore will be treated as non-systemically important HFCs,” the draft guidelines said.

For non-systemically important HFCs, the guidelines will be more or less modelled after normal NBFCs, the guidelines said. Therefore, the central bank’s directions on liquidity risk framework and liquidity coverage ratio, securitisation, etc., for NBFCs, will be made applicable to HFCs. Such harmonisation will be done over two years, and till then HFCs can follow the extant NHB norms, the RBI said.

While treating HFCs as another form of NBFCs, the RBI draft proposed to carve out a slightly separate set of rules for HFCs.

Qualifying assets refer to ‘housing finance’ or ‘providing finance for housing’ according to the definition, and not less than 50 per cent of net assets should be in the nature of ‘qualifying assets’ for HFCs, of which at least 75 per cent should be towards individual housing loans, the RBI said.  

If an HFC does not fulfil the criterion, it will be treated as NBFC-Investment and Credit Company (NBFC-ICC) and will be required to approach the RBI for conversion of its certificate of registration from HFC to NBFC-ICC, the RBI said. However, such HFCs will be given a phased timeline of up to four years to comply with the new guidelines.